Just as mergers and acquisitions (M&A) can have many kinds of successful outcomes, there are plenty of ways in which a transaction can fail. A significant number of M&A deals do not make it through the negotiation stage.
Why? On its surface, the answer is simple: nine times out of ten, it’s because the buyer and seller can’t come to an agreement. Delve deeper into the question, however, and a world of complexities emerges. Disagreements are often about more than mere dollar figures.
The buyer and seller may disagree about the deal structure. Perhaps the seller wants to part with the company in full through a stock sale, while the buyer would rather pick and choose and purchase certain assets. The seller may be aiming for a merger, while the buyer would rather acquire and take control of the target in full. Insurance and tax liabilities may dissuade one side’s board of directors from approving of the deal.
One party’s intended finance structure may not work for the other. The buyer may not be able to secure enough cash to satisfy the seller, and the seller may be unwilling to receive equity in the buyer’s firm as an alternative.
The two parties may disagree on various terms of the sale contract, such as representations and warranties, indemnities, purchase price adjustments, and earnout provisions. The seller may not be happy keeping a portion of the sale in escrow until certain conditions are met, while the buyer may have doubts about the seller’s ability to meet those conditions.
Many of these issues stem from a fundamental dispute over the valuation of the target company. The seller values the company higher than the buyer does, and the two parties are unable to find a way to sufficiently bridge the gap.
Assuming there’s little internal discord during the negotiation process, external factors could still spell the end of the deal.
Timing is one critical factor. One or both organizations may not be ready to truly commit to the merger or acquisition. The transaction could end abruptly in light of unforeseen changes in corporate leadership due to sudden serious illness, death, legal trouble, and so on.
Market forces sometimes upend negotiations midway through a transaction. If an innovative competitor materializes out of nowhere and changes an industry overnight, the target may not look as attractive as it once did. Investor interest in a certain market may abruptly shift, causing valuation to skyrocket or plummet.
Better options for the buyer or seller may come along at any time. Perhaps a once-shy acquirer has changed its mind, or the buyer’s first choice has reopened the dialogue. These third parties are likely to change the tenor of negotiations if the deal doesn’t end outright.
What to Watch Out For
When you’re working through an M&A transaction, it’s important to understand that short-term issues are often symptomatic of long-term problems. Watch out for…
- Culture clashes: If the seller and the buyer have divergent managerial philosophies or express conflicting values, it’s a sure sign the deal isn’t the right fit.
- Delays and disorder: It shouldn’t be a struggle to get all parties and materials organized on time.
- Unmet or unclear strategic concerns: The deal should be an obvious win-win for both sides.
- Tensions throughout the deal: A combative mindset doesn’t make for effective deal-making. If your negotiation partner is battling you on every minor detail, you’re better off walking away.
- Equivocation: Perhaps the buyer and seller don’t speak the same language, or maybe one side isn’t fully expressing its apprehensiveness. In some cases, one side’s internal team may not be on board. Be careful you’re not strung along—or doing the same to the other party.
If you adequately plan ahead, you can avoid many of the issues that crop up during an M&A transaction. Find the information you need to get started in my guide to pre-transaction planning.
ABOUT MICHAEL N. MERCURIO
Business attorney and M&A lawyer Michael N. Mercurio serves as outside general counsel on matters related to business law, M&A, and real estate law. As a strategic partner to firm clients, Mr. Mercurio regularly counsels entrepreneurial individuals and assorted entities on all aspects of business and commerce, with a core specialty in mergers and acquisitions—both from the sell side perspective and buy side perspective.
ABOUT OFFIT KURMAN
Offit Kurman is one of the fastest-growing, full-service law firms in the Mid-Atlantic region. With over 120 attorneys offering a comprehensive range of services in virtually every legal category, the firm is well positioned to meet the needs of dynamic businesses and the people who own and operate them. Our eight offices serve individual and corporate clients in the Maryland, Delaware, New Jersey, and Northern Virginia markets, as well as the Washington DC, Baltimore, Philadelphia, and New York City metropolitan areas. At Offit Kurman, we are our clients’ most trusted legal advisors, professionals who help maximize and protect business value and personal wealth. In every interaction, we consistently maintain our clients’ confidence by remaining focused on furthering their objectives and achieving their goals in an efficient manner. Trust, knowledge, confidence—in a partner, that’s perfect.
You can connect with Offit Kurman via our Blog, Facebook, Twitter, Google+, YouTube, and LinkedIn pages. You can also sign up to receive Law Matters, Offit Kurman’s monthly newsletter covering a diverse selection of legal and corporate thought leadership content.
MARYLAND | PENNSYLVANIA | VIRGINIA| NEW JERSEY | NEW YORK | DELAWARE | WASHINGTON, DC